S&P (INDEXSP:.INX) 1635 and 1650 are stair-step resistance, and the last level of lore before the top end of the trend channel arrives in and around S&P 1700.

I continue to 'trade around' my short bias in the S&P, having nibbled a bit into this morning's probe lower, but I'm not overtrading, if that makes any sense. There is a BIG bogie on Friday in the form of payrolls, so we'll likely see posturing as that draws closer.

Again, there are two sides -- there are always two sides -- so see them both, map a probability spectrum and manage your risk (rather than chasing reward). This is a nutty (and synthetic) tape, so it's hard to have too much confidence in any one stance, but it's not impossible if we adhere to the processes that got us here.

Good luck -- and be the ball!

R.P.

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Manufacturing Data, Q2 GDP, and Lockhart
Michael Sedacca

This morning the national ISM manufacturing data turned out to be "somewhere in the middle" of the overshoots of Milwaukee (40.6) and Chicago PMI (58.7) in both directions on Friday.

New orders (52.3 -> 48.8) and production (53.5 -> 48.6) slowed down, but prices paid and inventories started to moderate which is a good sign for manufacturing growth looking forward. The employment index remained steady at 50.1 from 50.2 last month. I will have a full preview of the regional manufacturing indexes for the month to date on the Buzz tomorrow, but thus far the decline seems to have stopped or in those. Remember that the non-manufacturing (services) ISM and ADP on Wednesday are the best gauges of Friday's NFP.

With the above data in hand, it seems to be a stretch that nominal GDP (YoY) for the Q2 will be above 3%. Under this assumption, the rates picture seems much more bullish, and some bond funds both high yield and muni are seeing some pretty historic discounts (that have become more historic over the last week) to NAV that it would be advantageous to look at for investment purposes. Granted, there are also some funds that had pretty obscene premiums to NAV that are seeing those come back towards reality.

Lockhart was on the tape about an hour or so ago, saying that the potential for deflation could increase QE purchases, but that it is an unlikely scenario. He said that he would favor decreasing purchases at the August or September meeting and that Fed officials need to sort out the mixed message on QE, but that the broad FOMC backs stimulus. Interestingly, he said it was not a foregone conclusion that Bernanke's term would end at the end of this year.

Wrapping all that up, things are likely to be erratic for the next few months. Given the growth prospects and inflation prospects, I don't see either picking up enough soon to justify the Fed pulling back on purchases yet. The market is going to have a point it is comfortable yet and I think we've overshot in both directions trying to find that in the past two months.

Note how TSLA accelerated to the downside on knifing through the prior swing high on 5/14.

The first signal reversal bar from 5/14 saw the stock squeeze higher, but the second signal bar on 5/29 has the second mouse getting some cheese.

It will be interesting to see how TSLA acts on this first pull back to its 20 since it went into overdrive in early May.

Check out the charts below:

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Tuesday, June 4, 2013

Corrective Pattern Still in Progress?
Michael Paulenoff

In the aftermath of yesterday's truncated decline in reaction to surprisingly weak economic data, the S&P E-mini pressed to a new reaction low at 1626.25 -- a full 3.5% off of the May 22 high at 1685.75 -- prior to staging a recovery rally back to the 1635/40 area.

The question now is whether or not the "ISM spike low" at 1626.25 ended a correction, or whether it represented the mid-point of a larger developing corrective process.

Let's notice that the index has recovered right to the lower side of its recent breakdown plateau between 1655 to 1640, which remains intact.

In the absence of upside continuation that hurdles and sustains above 1650/55, my instincts are telling me that any forthcoming strength represents an "intervening" rally within a larger, still-developing complex corrective process that will resolve itself in another downleg that breaks 1626.25 on the way to 1600 prior to completion.

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The Social Mood of... Bacon?
Professor Pinch

Yes yes, I'm going to talk about the social mood of bacon for a brief moment, because it's got this socionomic bouillabaisse of iconography and psychology swimming all around it.

What am I talking about? Well, let's look at the current transaction that has had everyone talking: the acquisition of Smithfield (NYSE:SFD) by Shuanghui International Holdings Limited. If you have ever watched the documentary Food, Inc., you know that our food industry has consolidated and grown in size while the number of food producers has drastically shrank. The market structures of several other key sectors of our economy, like telecom, media, pharmaceuticals, and financial services have also behaved similarly. "Us, everywhere, forever" is the mantra we've heard as companies grew in size while also reducing headcount and boosting efficiency.

But if you haven't noticed, our food supply is moving in the opposite direction: We want food trucks that give us shawarmas made with locally raised chicken and lamb. We go to farmer's markets where the produce was grown by someone that may have literally just picked it out of a field before they got to the market. It's local. It's small, It's inefficient. It's "me, here, now."

But the problem is, if this is your thesis for a trade, you can't really do a pair trade that goes short Smithfield and long your local food co-op, can you? But you can go long Whole Foods (NASDAQ:WFM) and short Smithfield on a pair. Or you can use some other large industrialized agricultural producer as another target. The risk/return aren't a perfect match since you're talking about a retailer and a food producer, but you get the idea. People's fear of "us, everywhere, forever" comes together at the meat and produce counters of your grocer. Want to revolt against a Chinese takeover of a US food manufacturer? Simple. Go where you can get bacon that was made from free-range hogs raised on a farm 100 miles away that doesn't use Monsanto (NYSE:MON)-based corn and steroids and antibiotics. This is right in Whole Foods' wheelhouse.

People like to talk about fashion and media trends as well, but food is what we feed ourselves with both figuratively and literally. I know the conventional wisdom is to look at food and food retailers as defensive plays, but in my mind, nothing expresses our mood as well as food.

Buy the Correction?
Tarquin Coe

Since recording a record high on May 22, the S&P 500 has consolidated and is now in its third week of sideways drift. The big question is "buy the weakness?"

The week the S&P 500 made a new all-time high, we counted an extreme number of buying climaxes. 864 U.S. listed stocks made new 52-week highs, only to end the week in the red. That was the second highest figure in the past ten years. Furthermore, other key international regions also recorded similar activity. The U.K. FTSE (INDEXFTSE:UKX) had the highest count in a decade, as did Japan.

Weekly buying climaxes are indicative of trend exhaustion. They provide strong evidence that the run since November 2012 is over with topping action now underway. The fact that the high buying climax reading coincided with news from the Fed regarding "tapering" as well as bullish calls from Goldman Sachs (NYSE:GS), as reported by Bloomberg at the time, adds a lot of weight to the signal.

Climaxes over the past several years have been overlaid onto the S&P 500. We have annotated the magnitude of market corrections following the three previous high climax counts in the U.S. market. Note the size of these: -8% in 2006, -17% in 2010 and then -22% in 2011. So far, since the May high, the S&P 500 has corrected a mere 4% high-to-low. In comparison to previous high climax counts, that pull-back number is short of the mark.

A clue that the correction is complete will come from same indicator, albeit in reverse, with weekly selling climaxes. A new 52-week low is made, but the share then ends the week in positive territory. A cluster of weekly selling climaxes, forming a mini bell curve, typically follow a high climax count. That bell curve will coincide with basing action on the index, with uptrend reassertion then duly following.

To conclude, we expect further corrective action with lower levels being necessary.

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Wednesday, June 5, 2013

Apple Patent Issue a Big Question Mark
Michael Comeau

Yesterday afternoon. the ITC ruled against Apple (NASDAQ:AAPL) in a patent dispute with key rival Samsung.

The ITF ruled that Apple infringed on a Samsung patent, and as a result, some older products like the iPhone 4 and iPad 2 can't be imported and/or sold.

That's not a big deal -- the iPhone 4 is over three years old and a new iPhone is just around the corner. The iPad 2 is over two years old. And the products in question are only the AT&T ones.

However, there are concerns that Samsung could try to extend the patent ban to other Apple products, counteracted by the possibility that President Obama could toss out the ban since it is related to standard essential patterns, which are usually expected to be licensed pretty easily and freely.

In other words, nobody knows anything.

But this is a patent case, so what else is new?

Beige Book Observations
Michael Sedacca

Since the data is for the most part backwards looking or things we already have, the effect is muted.

One thing I picked up on is that the auto sales rhetoric is a bit more tapered. For a while, the Fed has noted "strong" auto sales. That has now been tapered downgraded to "moderate." Not a negative, but not a good sign considering the exponential growth in subprime auto lending. Though, SAAR domestic auto sales plateaued in November 2012 at 12m and have remained around that mark for the past 6 months, so it's not something we don't already know.

Conversely, housing was upgraded to "moderate to strong pace," but no surprise given the strong growth in housing starts and new home sales.

Over the past 18 months we have discussed the global economic contraction that was steadily making progress toward the United States.

While it may have started in Europe, we observed the clear slowing in China's economy in the April issue of The Elliott Wave Financial Forecast and then the spread to our northern and southern borders (see June EWFF, p.8).

Despite historic fiscal and monetary stimulus, economic contraction has now jumped the border fence, as Monday's release of the most recent US ISM Manufacturing Index dropped to 49, its lowest level in four years. A reading below 50 is thought to signal outright contraction.

The steady march toward the depths beyond "recession" is apparently catching most economists by complete surprise. Yet take a look at this ISM chart: Do you see a trend?

See chart below.

Economists never look forward, only backward, yet even the most recent reading was "unexpected." Our forecast remains intact: the manufacturing index will fall much further.

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Thursday, June 6, 2013

Credit CheckFil Zucchi

Good morning all. As we sit 24 hours before the Big Bad Payroll number (tic) the trend of rising rates in everything bonds continues. High Yield rates are now a full 100bps off the bottom, with the increase in Treasury rates accounting for about 1/2 of that. The 2yr swaps, the US CDS, and foreign sovereign CDS remain very quiet, but large US financials CDS have been ticking up. Broad CDS indices on corporate bonds have also moved up a fair amount. The latter is what makes broad media news even though it is by far the least important as we monitor the true state of affairs in corporates.

Yesterday new issuance was zero except for a $250MM preferred by Allstate (NYSE:ALL), but Monday and Tuesday came in at more than $14 billion total. Hardly a crisis.

All in all, rates are clearly having a correction from lows that were totally unsustainable and counter-productive to new issuance. We just can't expect buyers to keep taking bonds that pay almost nothing. Aside from scary headlines which - make no mistake - WILL impact equities, there's nothing wrong with the demand for corporates, even if we were to go into an extended issuance lull and rates were to go up 100, 200, or 300 bps. from here. So while stocks could, and likely will, use the action in corporates as a catalyst to correct (and we know that the sharpest correction occur in primary moves) there is nothing to suggest that corporate buyers won't come back to the trough and companies will be handed more billions to rig their stocks.

For shorter term Minyans, since my long positions are mostly in Nasdaq related names, I looked at the Nasdaq-100 (INDEXNASDAQ:NDX) chart with long and short term Fibonacci retracement levels, horizontal support areas, and DeMark targets, and these are important areas I am watching: 2939 -> 2917, 2893 -> 2878, 2841 -> 2831, and 2800 -> 2769.

Again, while getting down to 2800 would probably freak people out, particularly considering that a lot of traders for more than 5 months were gorging on stocks because of the time tested/fail proof analysis that "today is Tuesday", it would actually do little to harm the longer trend in place since 2009, and may find even me arguing that at 2800 the Nasdaq really would look like a buying opportunity.

Doller Yen Yikes!Peter Prudden

What we are seeing unfold in world risk markets (equities, commodities, and currencies) is the potential unwind of the dollar-yen carry trade. We have witnessed a sharp decline off the recent high in dollar-yen, and risk assets are appropriately responding. Let's see how today's action unfolds. A spike reversal off highs in gold, crude, and treasuries prices along with a potential bottoming in the U.S. dollar and equities will largely confirm the new secular shift into stocks and out of fixed income.

Looking at a larger view of dollar-yen shows a potential double bottom in 1994 and the November 2012 low. These are the parallels I'm drawing against. Yes, a sharp rise was witnessed over the previous 6 months in the Nikkei (INDEXNIKKEI:NI225), U.S. stocks, and their respective currencies. If you are playing with the 2007-2012 playbook, then over bearishness is welcomed. I'm looking at a longer view and believe these moves, although near term extended, are just beginning to break out. In regard to stocks, we got the move from 1575 to the 1690-1700 level and are now back to an area of interest, for me that was 1610 with a bit of wiggle room. Holding here or slightly above the 2007 highs confirms my view for 1760. If we are to continue this fall then the new secular thesis is largely voided, and we will return to the E wave bear market scenario.

And the winner is...Todd Harrison

If a picture spoke 1000 words... you know the drill; we've been watching this for some time and true to form, we're stuck in the middle of dueling channels with a monster catalyst tomorrow. The question, of course, is how psychology is shaping up; estimates for the change in non-farm payrolls is 163,000.

If we blow out that number--a 300K print, for example--does the tape scream higher and then fade lower (as taper tantrums take hold)? I think so. Conversely, if it's a paltry print--a 50K lot--does the tape get hit before reversing higher on hope (of more stimulus)? Perhaps.

The trickiest print--and perhaps the path of maximum frustration--would be in-line, and we would quickly hear three days of volatility getting sucked out of option premiums.

I'm flat directional (SPY) risk, with an eye on adding some out-month downside exposure from higher levels (or, if the tape gets sloppy post print, I may re-initiate using the other side of S&P 1600 as my buy-stop). I do own some Facebook (NASDAQ:FB) calls, with a tight stop, as well as another blue-chipper, for a trade, but they're small potatoes relative to the risk bat of late. I'll tell you; that was some round trip!

I'm hosting a mid-quarter web-cast for our investors after the close so at a point, I've gotta gussy up. Fare ye well into the bell and remember, the definition of an investment should never be a trade gone awry, and the risk you go home with is what you'll wake up to in front of the most important economic release of all-time, that is until the next one arrives!

R.P.

Friday, June 7, 2013

The Bruce Lee MarketJeff Saut

Don't get set into one form, adapt it and build your own, and let it grow, be like water. Empty your mind, be formless, shapeless - like water. Now you put water in a cup, it becomes the cup; you put water into a bottle, it becomes the bottle; you put it in a teapot, it becomes the teapot. Now water can flow or it can crash. Be water, my friend.
- Bruce Lee; martial artist, actor, film maker

Recently, this has been the Bruce Lee stock market in that you have needed to be "water" in order to flow with the movements of the stock market. This week that movement has been downstream with a decline of ~5.3% from the intraday "high" of May 22 to yesterday's intraday "low;" and quite frankly, I really did not expect this week's 2 ½ session downside two-step that took the SPX to its 50-day moving average (@1605) where it found support (although the ensuing bounce came on very low volume).

Yesterday morning's Dow Dive began overseas when Mario Draghi suggested more monetary easing was not in the cards. Subsequently, the ECB left interest rates unchanged leading to the euro's rise against the U.S. dollar, which pressured U.S. stocks early in the day's trading. Adding to the Dow's consternations was a "flash crash" in Japan, while Italy also took a "hit" of 2.6%. The cacophony crested with the senior index shedding about 116 points into the lunch hour, leaving the NYSE McClellan Oscillator more oversold than I have seen it in a long time (see chart). And just like pressing down a spring produces a big bounce-back, a compressed McClellan Oscillator produced the same result for stocks Thursday afternoon. This is what I discussed in yesterday's Morning Tack in that the market typically gives investors a second chance to be intelligent with their portfolios. The inference was you do not sell stocks when they are as compressed as they were early in Thursday's session.

This morning, all eyes will be focused on the NFP employment numbers, which should set the tone for the stock market's next move. If the NFP numbers are favorable, yesterday's upside reversal should gather steam. If we rally back towards the recent highs, and fail to make higher highs, then my mid-July point of vulnerability will get moved close to now. If, however, we do make higher highs, the aforementioned scenario should play. That scenario called for higher highs into July and then the potential for the first serious decline of the year. And make no mistake, if that July swoon occurs, I think it will be a swoon for buying because I believe stocks will be higher by year end. Interesting, one would expect the recent winners to be sold in the pullback since the May 22 downside reversal, but that is not what has happened. Indeed, the stocks that have been the biggest winners YTD have held up the best! Surprisingly, the stocks that have been sold are the higher dividend payers, which is NOT what usually happens on a pullback. Also of interest is that companies generating the highest percentage of revenues outside the U.S. have outperformed their "domestic revenue" brethren. Indeed, "Be water, my friend!"

Hedges On: Is It Time for the 50 day dance?Brandon Perry

I'm adding my hedges back here as we test the 1636-1640 level. A little too deep into that area for my liking, but we can't always get what we want. It may be time for the market play around near the 50-day moving average as bulls and bears fight it out for the next 5% move. Bears will get aggressive lower, and bulls will get defensive. I expect whippy action the closer we get to the 50-day moving average. I will hedge up into the downtrend line and take them off "in the hole". Stops are above the old lateral resistance and down trend highlighted in the chart. Good luck and happy Friday!

How to Trade The Rest of the DayPhil Erlanger

On the SPDR S&P 500 ETF (NYSEARCA:SPY)we have a classic gap open. All day we have traded above the intraday DMA Channel (yellow band). We are well above resistance (red) so do not think about shorting here.

The most important line for today now are the one hour ranges. You might want to be cute and try and scalp a break of the one hour high (light blue line) or wait for SPY to trade under the intraday DMA Channel. Typically, a day like today ends with more strength. You have been warned.

The dashed lines are the 5-minute range. Pivot is magenta. Support is green. Aqua is prior day two hour high. Brown is the prior day two hour low.

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